Carbon contracts: Understanding your legal obligationsCarbon contracts: Understanding your legal obligations
Part 2- Extension Ag Law Specialist Tiffany Lashmet discusses the importance of understanding the carbon contract length, measurement methods, data requirements and legalese before signing an agreement.
March 10, 2023
This is Part 2 of, “Carbon contracts: 8 items to consider before signing.”
Carbon credits and carbon sequestration are a hot topic. Companies pledging to be carbon neutral are looking to agriculture to help them fulfill those promises. But before signing a contract agreeing to the sequestration of carbon on your farm or ranch, Texas A&M Extension Agriculture Law Specialist Tiffany Lashmet says there are some important items to consider.
“I’ve gotten calls from producers who have signed contracts without reading them, that are like, ‘Oh, no. How do we get out of this?’ six months in.” To help avoid this situation and others, Lashmet says there are eight items to consider before signing a carbon contract:
Carefully read the contract.
Understand the agreed-upon practices.
Review the payment terms.
Understand the scope of the stacking provision.
Know the term or length of the contract.
Establish how measurement or verification is determined.
Know the production data requirements.
Understand the legalese.
Once producers read the contract and understand the agreed-upon practices, payment terms and the stacking provisions, it’s important to determine the length of the contract. Lashmet says a 10-year contract is not uncommon.
“Watch out for extensions. Some of the contracts will let the company take an extension at their own discretion at the end of the term. Also, watch for any discussion of permanence. Sometimes in the contracts, maybe it's a 10-year contract, but there's a permanent requirement that makes you not do anything to undo the carbon that's been stored for an additional time. So, watch for that as well.”
Lashmet also warns of offers to “try a contract” with the contingency that if it doesn’t work, they can walk away. “Can I tell you a lawyer's secret? You can never just walk away from a contract. That's why people like me have jobs, to make sure that doesn't happen.
“Truthfully, how that should be worded is, ‘You have the right to terminate the contract early and then deal with the penalties that follow from that,” she advises.
Most contracts have steep termination penalties. “I may have to pay back payments I've already received. I may forfeit any bonus payments. There's one contract I've seen where I have to reimburse the company for costs they've incurred related to that contract. There can be legal fees and drafting fees and measurement costs. So, just beware,” Lashmet says.
Some contracts are subject to a vesting payment. “Maybe your payments don't vest until you've had them for five years. There's one contract that vests at 50% in year one and then like 10 additional percent through year five. So, if I quit in year three, I'm going to walk away with 70% of the money I earned, not 100%.”
Also, look for statements regarding the company’s right to terminate the contract. Lashmet gave the following example. “It says if carbon offset customer data or market conditions are deemed by the company in its sole discretion to be insufficient for purposes of the project, the company may terminate this agreement upon written notice to the parties.
“Now, that sounds like the company can just walk away, doesn't it? But who can't just walk away? You.”
Lashmet says producers need to understand how the carbon is going to be measured or verified. “How are they going to measure or model? What methods are they going to use and when?”
Also, establish who is going to pay for testing. “That should be the company,” she says. “Some contracts have what I call no-reversal clauses. Those say that I, the landowner, am going to guarantee that when you come to measure, there will not be less carbon than your earlier measurement. So, if you come measure, let’s say there’s 10 tons of carbon in the soil. Then when you come back, there will be 10 or more. I’m going to guarantee that to you.
“I don’t know how you make that guarantee because there’s a lot of things about carbon that I can’t control. Maybe I do all the practices that I’m supposed to – the no-till, the cover crops – and then there’s a drought. What happens then to carbon sequestered? It goes down and I don’t have any control over that. What if there’s a wildfire? What if it’s measured wrong or I have a problem with your model?”
Producers are also required to divulge their data. “All of it,” Lashmet adds. “They want yields, pesticide volumes, fire history. On the livestock side, they want birth weights, weaning weights and conception percentages.”
They also want rights to enter the property and take aerial drone imaging. “To some, that may not seem like a big deal. But to others, that’s a big deal.”
Finally, Lashmet says there are nine contract “legalese” items to consider.
Right to assign
Attorney fee provision
Payment for negotiation/drafting
Choice of law
Class action waivers
Scope of waiver clauses
“Pay attention to the right to assign. The Cliff Notes version of that is they're probably going to limit your right to assign the contract. They will be able to assign it to whoever they want. So, I do my homework and I look at all the companies and I read the contracts and I talk to producers and I say, I am going with company A, that's the only company I want to do business with. A week later, they can assign that contract to company B. So, pay attention to that.”
Another consideration is their terms regarding class action lawsuits. Lashmet has seen a contract that basically says, “If you’re going to sue the company related to this contract, you agree it’s going to be on an individual basis. You will not be part of any class action lawsuit.
“When you think about all the ag class actions from the last several years – Syngenta, Liberty Link dicamba – are we going to start seeing these in more ag contracts as a way to try to prevent those type of lawsuits by farmers? I don't know. I think it’s fascinating and something to watch.”
For more information, visit Lashmet's Texas Agriculture Law Blog and search "carbon contracts," for blogs and links to podcasts.
Read more about:Carbon SequestrationCarbon CreditsCarbon Market
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